Some stocks poised for breakout

Kevin Marder is a guest columnist and a co-founder of MarketWatch. He is
principal of Marder Investment Advisors Corp. and a contributor to
The Gilmo
Report. Previously, he served as chief market strategist for Ladenburg Thalmann
Co. and developed institutional fixed-income risk management software for
Capital Management Sciences.

The expectation when one big up day is followed by a second is for there to be some giveback on the third day. This is natural as profit takers emerge to lock in gains.

For the Nasdaq Composite
COMP, -0.01%
, each of the past three sessions has seen its range tighten. Volume, if not drying up, is at least around average levels. On the New York Stock Exchange, volume has dried up from one day to the next.

The range tightening and the average to below-average volume, combined with many breakouts from six-week-plus bases, augur for richer quotations.

In Friday's report, it was noted that "the vast majority of leading growth and building-related issues leave something to be desired." Both segments improved on Friday and Monday.

It is to be noted that the growth sector does not lead every market advance. In fact, it may only lead about 40%-50% of the time. The latter half of a bull market often sees rotation out of growth and into cyclical/value shares. By that point, the economy is expanding, not merely recovering. As such, participants no longer need to pay a premium for earnings growth by buying growth stocks, which are recession-resistant vehicles.

By that point in the cycle, the earnings growth is there in cyclical/value issues, and at a cheaper multiple than growth shares, which by that point have seen their multiples expand materially.

At this juncture in the cycle, some growth stocks are victims of their own success, having run up quite a ways since the bull market launched nearly four years ago. Apple
AAPL, -0.87%
and Baidu
BIDU, -1.04%
are examples.

Among the names, 3-D printer manufacturers Three D Systems
DDD, -4.98%
and Stratasys
SSYS, -5.94%
lead the growth sector. Both were mentioned here on Dec. 20 as attractive for the aggressive speculator. Even if one misses an entry in a leading name, it is important to keep the issue on a watch list. At some point, it will pull back within the confines of its up trend, possibly offering an alternative entry point.

Regardless of whether one owns the stock or not, seeing a speculative growth glamour like DDD rise 3% Monday on heavy volume that was 106% above average is a good omen for the market overall.

Amazon.com
AMZN, -0.11%
is a turnaround play, having recorded peak per-share earnings of $2.53 in '10, followed by a decline to $1.37 in '11. A further fall to an estimated $0.03 in '12 is what most analysts see. In '13, however, the consensus is for a profit of $1.74 a share.

The online retailer broke out to a record high Monday, up 3.6% on volume 43% above normal. An intermediate-term speculator could enter around Monday's closing level of $268.46, using a 5%-7% protective stop in case proven incorrect.

Catamaran
US:CTRX
is a pharmacy benefit management services provider with a focus on IT systems. Earnings stability is relatively low for a company with a 38% annualized growth rate over the past half-dozen years. Most analysts eye earnings growth of 37%/63% in '12/'13.

Technically, the stock has been basing since last spring as it digests a prior 149% move clocked in just six months. Monday, it took out its nearby swing high on volume 45% above normal. It offers two possible entry points. For aggressive players, it could potentially be entered around Monday's closing level of $51.77, using a 7% stop that would be just beneath the 50-day moving average. A less-aggressive pivot point for entry would be on a takeout of the record high set Nov. 2 at $53.13.

Acadia Healthcare
ACHC, +1.00%
an operator of psychiatric services centers, is expected by most analysts to earn 65 cents a share in '12, followed by $1.03 a share in '13, or a growth rate of 58%. The stock debuted on the Nasdaq in November '11 at about 9, and proceeded to move to 24 and change by the end of September. Since then, it has been basing. Over the past six weeks, the base has tightened up, a positive omen. Last Wednesday, price rose 4.4% on volume 133% above average. This was a heads-up for a possible breakout. In bullish fashion, price pulled back on diminished volume the past three sessions. Thursday's high of $24.64 represents a potential entry pivot for a medium-term speculator. A 7% stop loss below entry would be reasonable in case proven incorrect.

Elsewhere, Cornerstone Ondemand
CSOD, +2.18%
showed impressive volume of 63% above average on Monday, and can be taken above Monday's close of $31.04. A less-aggressive speculator would consider waiting until the base is completed... Bonanza Creek Energy
BCEI, -5.56%
along with DDD, SSYS, and QIHU, are among the brightest glamours...Building-related titles such as MHO, PHM, RYL are expected to continue their outperformance, as lumber futures are poised to hit a price high...Other titles set up, but are beyond the space limitations of this report.

In summation, the averages show very little profit-taking as they tighten up amid lighter volume. Despite the quieter trade of Friday and Monday, some leaders wheel into position and break out. The position trader in relative strength titles has an increasing menu from which to choose. Richer quotations appear imminent.

At the time of this writing, of the stocks mentioned in this report, Kevin Marder or an affiliate thereof held no positions, though positions are subject to change at any time and without notice. The information contained herein may have been previously disseminated.

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